Editorial: State tax reform is a rebalancing act

Minnesota Revenue Commissioner Myron Frans has been spotted toting two three-legged stools lately.

No, state operations haven't become so spartan that officials must bring their own furniture to meetings. Rather, Frans is using the specially made stools as props to illustrate the need for an overhaul of the state's tax structure.

One of the stools is marked "1999," the year the state embarked on a series of income and property tax cuts. It leans a little because one of its legs -- the one labeled "property tax" -- is slightly shorter than the other two, which are labeled "sales tax" and "income tax."

But it stands upright fairly well -- a metaphor for a tax system that relied fairly equally on three types of taxes.

The second stool is labeled "2010," and it tilts so badly that it cannot stand. The three legs differ markedly in length.

The longest is the property tax leg, signifying that property taxes now account for nearly 40 percent of total state and local tax revenue, a major change since 1999.

The shortest 2010 leg is the sales tax, shriveled from nearly 35 percent to just 26.6 percent of total revenue in 11 years. The income tax leg is slightly shorter than it was in the 1999 version.

Of course, state tax systems are not furniture. But the props make a good point: A state does well to keep income, sales and property taxes in near balance.

Each tax type has inherent advantages and disadvantages for achieving fairness, simplicity and stability in government services without hindering economic growth.

Rely on any one tax type too much, and its defects become painfully obvious, while the advantages of the tax that's minimized are lost.

That's what's happened to Minnesota in the last decade. Too much dependence on the regressive property tax has proven bad for business, bad for homeowners with low or fixed incomes, and bad for local governments that must overcome mounting property tax resistance to finance basic services.

Meanwhile, the sales tax leg is destined to keep shrinking, since the tax falls mainly on the purchase of durable goods, not services, and is easy for online buyers to avoid.

And while the income tax leg bears about the same share of the load that it did 12 years ago, credits, deductions and exemptions that benefit upper-income filers have functioned like termites, eroding that leg's strength as well.

With his stools in tow, Frans has begun convening public meetings around the state to make the case for tax reform. He aims to inform Minnesotans about the ills associated with the current structure and collect ideas for its improvement.

His goal is to deliver a recommendation to the 2013 Legislature. (For more information, go to www.startribune.com/a847.)

The commissioner's initial thinking about what must change is sound. Unlike his boss, Gov. Mark Dayton, who rode into office in 2010 on a call for higher income taxes for the rich, Frans has a broader agenda.

He's interested in applying the sales tax to more purchases, perhaps enough of them to allow for a lower overall rate. He's talking about closing loopholes that riddle both the corporate and personal income tax codes.

Do enough of that, and Dayton's tax equity goal might be met without resorting to an uncompetitively high rate on upper earners.

We're less sanguine about the personal, stump-the-state approach Frans is taking to try to sell his tax reform ideas. Previous such efforts have invited leaders of all parties to participate in a commission, or "supercommittee."

That approach doesn't guarantee success, as Congress recently demonstrated. A bipartisan panel could prove so deeply divided that it cannot produce recommendations.

But by taking the lead himself, Frans risks automatic GOP rejection of his product. That outcome is much to be avoided. More than the success of the Dayton administration is riding on Frans' efforts.

The opportunity to emerge from the Great Recession with a modern, more competitive tax structure ought to mobilize Minnesotans of all political stripes -- especially GOP allies in the business community.

Frans should engage a wide array of Minnesotans who understand the need for tax reform. And Minnesotans who do should offer him good-faith cooperation.

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